Jul 25, 2017

Is GST killing Make in India?

Is GST killing Make-in-India? 

Is GST making imports cheaper? Is it harming make-in-India initiative? 

While it is easy to dismiss such questions in the face of yay-we-rolled-out-GST euphoria, it still makes sense to analyse some challenges that GST has thrown up in terms of cheaper imports and greater competition to domestic industries. 

Cheaper imports for finished goods

Before GST, the major components of import duties were Basic Customs Duty (BCD) and Additional Duty of Customs (ADC) along with Special Additional Duty (SAD). The ADC and SAD together were bigger components that usually totalled around 20% of the value of goods for most of the items and not refundable to most extent. 
The ADC part was equal to central excise duty (usually 12 to 16% for most items) and SAD was equal to 4% of value of goods. For a merchant who imported finished goods and sold them locally, SAD was refundable upon production of sale documents while ADC was not refundable at all. The ADC part, and many a times SAD part (especially for those who sold cash/without invoice), was passed on to the consumer, thus making imports costlier. 
After GST, SAD and ADC have been subsumed under IGST. We have BCD and IGST imposed on goods at the border. IGST paid at the border is available for an importing merchant as input tax credit which he may use to pay downstream taxes. Therefore, to that extent IGST doesn't add to the cost of imports thus making them cheaper. 

In effect, GST has brought down the import duties across board by around 15 to 20% for most sectors. This is a huge and sudden decrease, the effect of which may show itself in coming months. This is why Jeep prices have fallen. 

FTA effect on GST imports


The second effect is with respect to countries with whom India has signed Free Trade Agreements making BCD zero or almost zero. Under GST, any import from such countries (Bangladesh, Sri Lanka) is as good as buying from any state in India. One just needs to pay IGST at the border and take credit against it. For proximate countries, the GST turns them into another Indian state for taxation purpose. This is a threat to sectors such as textiles, who are already facing heat from countries like Bangladesh. Add to it the fact that Bangladesh uses cheap Chinese fabric to make garments, we can expect a significant rise in cheap imports of finished garments. Different sectors may face similar threats from other countries. 

GST effect on domestic export industry


From the above, it may be surmised that those who make finished goods may find greater competition from cheaper imports. This would warrant a greater hand-holding for domestic sector, including those who export. However, GST has, in the name of tax compliance, blocked the working capital by doing away with various exemptions that were available earlier. IGST exemption for export sector has been removed. Merchants cannot avail the facility of procuring against Bond without IGST payment from manufacturers for export. Such moves tie up productive capital, further deteriorating competitiveness. FIEO estimates that such blocking of capital has an effect of 2% price increase (and commensurate decrease in compeitiveness) on export products across all sectors on an average. This comes at a wrong time and might hurt our exports. 


Is everything that bad with GST


No. The procedural simplifications envisaged under GST would do good in the long run, and before all of us are dead. Those who wished to be part of Global value chains in intermediate goods trade would now find that the zero rating of exports works the way it is supposed to be. With India signing Trade Facilitation Agreement at WTO, border procedures are bound to get simpler with time, and with the correct taxation system under GST, the competitiveness should rise. 

I see a J curve effect here with things improving as time passes.